Predicting Global Imbalances on the Eve of Covid-19

Just out, my paper with Hiro Ito, “Requiem for ‘Blame It on Beijing'” [link thru Nov 28] (final version submitted on December 25, 2019):

Global current account imbalances have reappeared, although the extent and distribution of these imbalances are noticeably different from those experienced in the middle of the last decade. What does that recurrence mean for our understanding of the origin and nature of such imbalances? Will imbalances persist over time? Informed by empirical estimates of the determinants of current account imbalances encompassing the period after the global recession, we find that – as before – the observable manifestations of the factors driving the global saving glut have limited explanatory power for the time series variation in imbalances. Fiscal factors determine imbalances, and have accounted for a noticeable share of the recent variation in imbalances, including in the U.S. and Germany. For advanced economies, the financial component of the current account has been playing an increasing role to determine the movements of the account. Examining observable policy actions, it is clear that net official flows have been associated with some share of imbalances, although tracing out the motivations for intervention is difficult. Looking forward, it is clear that policy can influence global imbalances, although some component of the U.S. deficit will likely remain given the U.S. role in generating safe assets.

Figure 1 from the paper shows what the IMF was forecasting in its October 2019 IMF World Economic Outlook (WEO):

Source: Chinn and Ito (2021) using IMF WEO (October 2019) data. Note: US is green, China is orange.

This is what actually happened (along with the April 2021 WEO forecasts):

Source: IMF WEO (April 2021). Note: US is blue, China is dark green.

New forecasts will come out with the October 2021 WEO within the next week and a half. For now, it’s interesting to see a predicted shrinkage of current account imbalances after the predictable 2020-21 surge (predictable in part due to the aggressive fiscal stimulus in the US). The April WEO viewed the increases in imbalances as temporary. To the extent that assessment is correct, we should see the longer term factors re-assert themselves.

On the other hand, the 2021 External Sector Report stresses the importance of fiscal policy — and indeed in our paper we find a heightened impact of fiscal policy. That means the trajectory of imbalances depends substantially on how post-Covid fiscal policy is conducted.


23 thoughts on “Predicting Global Imbalances on the Eve of Covid-19

  1. Moses Herzog

    Semi-provocative title to the paper (but nothing I seriously take issue with). In today’s world one is foolish not to put their best foot forward, and/or recognize what makes things more attractive for clicks or downloads. I would do the same. One hopes America will come to terms with its self-destructive behaviors related to refusal to take vaccines, refusal to wear masks, low literacy, poor quality of public education etc. which they wish to blame on other nations. I have my doubts on that epiphany occurring for the American public in a large-scale way.

    So, who wants party favors??

    1. Moses Herzog

      I’m sitting here, drinking Monster drink, trying to get the memory of that godawful taste of that incorrectly mixed Dunkin Donuts strawberry coolatta out of my head. halfway watching this KC vs Buffalo game(BTW, for whatever it’s worth coming from this lifetime degenerate who has watched tons of sports in his life, Al Michaels and Cris Collinsworth or my favorite TV broadcasting, stress on TV, duo of all time) and daydreaming while half reading stuff. And I really randomly read a paragraph from a paper and it kinda hit me, Krugman has given Germany lots of sh*t about having the current account surplus but Krugman has given China very little guff about having the current account surplus. Now, this is an earnest question, no facetiousness or “subtext message” in the question, I’m straight asking it. Why the difference there?? Why are the Germans given so much flack from Krugman on current account surpluses but Krugman gives very little flack to China?? Now my first observation is Germans live a pretty high quality of life, and arguably many Chinese live a life of subsistence. So….. Germans could afford to “forfeit” some of that current account surplus, yet maybe China while trying to improve standards of living “cannot afford to forfeit” their current account surplus. Is that the rational (right or wrong, I have no dog in this hunt) for Krugman’s different attitude/stance towards two countries doing the exact</b same thing??

      Menzie's or anyone’s thoughts on my query here would be appreciated. Even just “educated guesses” on Krugman’s seeming “inconsistency” here.

      1. Moses Herzog

        Does this get back to the many countries/cultures, one Euro currency question again?? Because at first glance I’m not seeing it.

        1. Moses Herzog

          You got me a little red-faced right now. Maybe more than “a little” red-faced. I read him pretty regular, I don’t know how I missed this. But I obviously did. Sorry for getting the facts wrong here.

          1. Moses Herzog

            This reminds me of that horrid error I made reading that graph that one time. I’d look it up and give the link, but I got enough self-hate to last for the next week so, I guess i’ll just try to forget that.

    1. Moses Herzog

      You never miss a drumbeat do you??

      Just remember half the team that wrote the paper is ethnic Japanese and if you’re mainland Chinese you’ll never be allowed to take back that oversight. If I told you what a former Chinese colleague of Inner Mongolia persuasion openly said to me about the Japanese even you might blush. But then I suppose for disingenuous lip-service you’d tell me he’s not Han so that would explain the lack of gentility.

  2. ltr,134,534,158,111,&s=BCA_NGDPD,&sy=2007&ey=2021&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort=country&ds=.&br=1

    April 15, 2021

    Current Account Balance as percent of Gross Domestic Product for China, Germany, India, Japan and United States, 2007-2021


    China ( 9.9)

    Germany ( 6.9)

    India ( – 1.3)

    Japan ( 4.6)

    United States ( – 5.1)


    China ( 1.6)

    Germany ( 7.9)

    India ( – 1.8)

    Japan ( 4.1)

    United States ( – 1.9)


    China ( 1.6)

    Germany ( 7.6)

    India ( – 1.2)

    Japan ( 3.6)

    United States ( – 3.9)

    1. baffling

      why do you post so many links with odd past dates, such as august 4, 2014? even when the data is current?

  3. Moses Hersog

    Glad I decided to wait until these next coming weekdays to get some adult drinks in the house. Tornado chances jumped dramatically here for Sunday night. Not “event level” but below that, what they call “medium” which is more serious than it sounds (I’m convinced 80% of TV weathermen/weatherwomen have some form of Down syndrome, the terminology and color codes used to grade levels of severity of storms are so confusing as to make you think they worked at it). For example, in addition to “medium” risk being ONE level below “event level” (which is the crap your pants kind of tornado event) most of the local TV weatherpeople here are saying the risk starts around 4pm. But one of those same weatherpeople runs a computer simulation of the storm progression which shows the storms don’t hit until 11pm at the earliest, So why the hell am I supposed to start paying attention at 4pm, 7 hours earlier than a computer simulation is telling us when the storms hit?!?!?!

    Here is the deal, with smartphones and computers, watching a TV weatherperson has become a near complete waste of time. Watching the TV weatherpeople you will either being sitting in front of your TV 8 hours for an event that won’t happen or is 1/3 of the day away, or your body will be flying 1/4 of a mile into the air with your neighbor’s limestone sink flying by your head, because they couldn’t figure out there would even be tornadoes inside your state, until barely 24 hours before.

    Watch NOAA, NWS, National Storm Prediction Center (to identify weather fronts and jet stream) Weather Underground radar, and let the local idiots watch the TV weatherman who doesn’t know local geography 101 tell the village idiots “Yes, the storm, as you can see, is 1 inch away from my index finger, and 2 inches from my thumb, and I’m shielding the eastern half portion of the state radar from tornadoes with my morbidly obese body, so if you live near my index finger, take storm shelter immediately” You’re left wondering how these absolute morons ever got a meteorological degree which actually you have to pass some science and math to get that degree. How?? Might be the mid-term exam answer keys they pass around at the Greek frat houses is all I can say.

  4. ltr

    Thank you and Hiro Ito so much for this fine paper.

    [ That I was attacked in racial tones for writing such a note is important, terrifying and important. I had just finished reading this important article:

    October 10, 2021

    Black Lives Matter, She Wrote. Then ‘Everything Just Imploded.’
    A Black superintendent’s email to parents after the killing of George Floyd engulfed a small, predominantly white Maryland community in a yearlong firestorm.
    By Erica L. Green ]

  5. ltr

    October 10, 2021

    Black Lives Matter, She Wrote. Then ‘Everything Just Imploded.’
    A Black superintendent’s email to parents after the killing of George Floyd engulfed a small, predominantly white Maryland community in a yearlong firestorm.
    By Erica L. Green

    CENTREVILLE, Md. — When Andrea Kane sat down to write a letter to parents in her school district days after George Floyd’s death in 2020, images of the Black man pleading for his life under the knee of a white Minnesota police officer were haunting her.

    Dr. Kane, the superintendent, saw him in the faces of Black students in her district and heard him crying out for his mother when she spoke to her own sons. So she started her letter with a warning that it would bear not just “good news,” but “a bit of a reality check.”

    Despite the coronavirus pandemic, the high-performing district on the Eastern Shore of Maryland had closed out the year with much to be proud of. But like the rest of the country, Dr. Kane said, the community had another crisis to confront.

    “Racism is alive in our country, our state, in Queen Anne’s County, and our schools,” she wrote in the letter, emailed to the parents of all 7,700 students in the district.

    Her statement mirrored hundreds that superintendents across the country had issued in the wake of Mr. Floyd’s death and the mass protests that followed. Many of the educators took the opportunity to renew their commitment to racial justice in their schools.

    But the message from Dr. Kane, the first Black superintendent of Queen Anne’s County Public Schools, would engulf the small, predominantly white community tucked along the Chesapeake Bay in a yearlong firestorm.

    “When I hit send,” Dr. Kane recalled recently, “everything just imploded.”

    Over the last year, the protests and reflection prompted by Mr. Floyd’s death reverberated in school districts throughout the country, as school boards and legislatures reconsidered how and what students should learn about race and racism, from the history of slavery and segregation to the Black Lives Matter movement.

    A protest in Virginia against “critical race theory,” a term often used to attack any discussion of race and racism in class. The debate pits educators who feel obligated to teach about racism against mostly white parents and politicians.Credit…Evelyn Hockstein/Reuters

    The debate has sometimes focused on K-12 curriculums after conservative activists began branding a range of topics including history lessons and diversity initiatives as “critical race theory,” an academic framework that views racism as ingrained in law and other modern institutions. The term is now often deployed to attack any discussion of race and racism in American classrooms — pitting educators who feel obligated to teach the realities of racism against predominantly white parents and politicians who believe that schools are forcing white children to feel ashamed of their race and country.

    Superintendents are feeling the brunt of the backlash. Some have been threatened, harassed and fired over accusations they are seeking to “indoctrinate” children through books, history lessons and equity policies, said Daniel A. Domenech, president of the AASA, the School Superintendents Association, which represents nearly 14,000 district leaders across the country.

    For Black educators in particular, the opposition has felt personal and poignant. Only 2 percent of the nation’s superintendents are Black, according to the AASA’s latest count, and many are expecting that number to shrink.

    Michael D. McFarland, president of the National Alliance of Black School Educators, said that many African American school administrators are already unfairly branded as activists, and scrutinized for any perceived misstep.

    Particularly in majority-white communities, Dr. McFarland said, “it’s harder for you to do the work that you were hired to do” as a superintendent, “let alone take stances on equity and social justice issues.”

    “To take those stances comes at an enormous cost,” he added.

    Dr. Kane thought long and hard about the cost of staying silent.

    She knew the Black Lives Matter movement was divisive — even in the Black community — but it didn’t make the mantra any less true. She felt she would have been negligent in her role had she not addressed the images her students were seeing on television. “How could I not help them make sense of a Black body being destroyed in the street?” she said.

    With all of this in mind, she agonized over every word of the letter she wrote on June 5, 2020.

    “When I say ‘Black Lives Matter,’ it is not meant to disparage any other race,” she wrote. “It is an acknowledgment of the disparate brutality and overt racism that is only experienced by Black people in America, including me.” …

    1. Moses Herzog

      Maybe I’m too cynical sometimes?? But, uuh, I don’t think so. You know why??~~because when I try not to be cynical about people, my ratio of being wrong goes up by multiples. And many (no, NOT all) people I thought “knew better” would eventually say something. Now, it’s bizarre/abnormal feeling when your friend (my old Chinese friends in this case) tells you their darker nature. You feel flattered they trust you and feel close enough with you to share it, and you (or at least me) like that feeling of trust. The “real friends share everything”, and even things they know will make the other party (their friend) angry. But also another part of you feels let down, because “you” thought (I did) they had a broader view. So what do “you” say then?? You try to hold on to the friendships that are rare to find in this world, and figure that people are generally “going to be people” and that nearly every person on Earth has prejudices and biases and leave it there.

  6. ltr

    Thank you and Hiro Ito so much for this fine paper.

    [ However frightened, I will not be intimidated. ]

  7. ltr

    Thank you and Hiro Ito so much for this fine paper.

    [ That I was attacked for writing such a grateful note is important, terrifying and important. ]

  8. Barkley Rosser

    Why a lot of people in the US are unaware of the actual state of Chinese current account balances is that there is a large bilateral imbalance between the US and China, while China is running deficits with other nations.

    The problem with Germany is that it really should have an exchange rate change with respect to the rest of the eurozone. But that is not able to happen given the unification of the currency.

  9. ltr

    Thank you and Hiro Ito so much for this fine paper.

    [ That I was attacked in racial tones for writing such a note is important, terrifying and important. I had after all just finished reading this important article:

    October 10, 2021

    Black Lives Matter, She Wrote. Then ‘Everything Just Imploded.’
    A Black superintendent’s email to parents after the killing of George Floyd engulfed a small, predominantly white Maryland community in a yearlong firestorm.
    By Erica L. Green ]

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